Dear Seattle Startup Community:
What an amazing and exciting time to be a startup in Seattle! The members of Lane Powell’s Startups
and Emerging Companies Practice Group are delighted to be in the middle of this perfect storm, and
to be supporting the Seattle startup community by partnering with the Puget Sound Business Journal
to present our second annual Startups and Emerging Companies Seminar. The seminar is scheduled
for Wednesday, December 2, and will be hosted at Motif Seattle.
We were extremely happy with the outcome of last year’s seminar and received great feedback.
New this year:
• Our presentations are designed to be even more practical as each attorney will partner with
a presenter from the business community to maximize the utility of the content;
Patrick J. Franke is a corporate lawyer,
Chair of the Business Department, and leads
the Firm’s Startups and Emerging Companies
Practice Group. He can be reached at
206.223.7100 or frankep@lanepowell.com.
• We have added a keynote speaker at lunch to break up the day and provide a unique
perspective on a compelling topic;
• In response to the clear fan-favorite from last year’s seminar, we have extended the
investor panel discussion to provide even more helpful insights from the local investment
community; and
• We will be hosting a networking event following the seminar with complimentary beverages
and hor d’oeuvres at Motif ’s Frolik Kitchen + Cocktails, which will allow attendees to socialize
and provide additional access to the presenters and investors.
We think it will be a very fun and informative day and look forward to seeing you
on December 2!
Patrick J. Franke
Lane Powell Shareholder, Chair of the Firm’s Business Department,
and Leader of the Firm’s Startups and Emerging Companies Practice Group
For more information or to register for our Startups and Emerging Companies Seminar,
please visit our website at www.lanepowell.com.
Introducing Our Investor Panel
The Panelists:
Edith Dorsen | Managing Director and Co-founder | Women’s Venture Capital Fund
Edith co-founded the Women’s Venture Capital Fund, which invests in early-stage companies on the West Coast that have completed
a significant angel capital raise, are demonstrating bona fide market traction and include women in senior leadership. As Managing
Partner, she has primary responsibility for fundraising, deal sourcing, diligence and investor relations. Currently, Edith is a Board
Member or Advisor to Nvoicepay, Inc., EdSurge, Inc. and Proxio, Inc., and oversees investments in four other portfolio companies for
the Fund.
Edith brings a unique breadth and depth of experience to venture capital. Prior to founding the Women’s Venture Capital Fund, she
was a Management Consultant at McKinsey, Investment Banker at Salomon Brothers, and Senior Business Development Officer or
Advisor to several early-stage companies and large corporations. She is a graduate of the Harvard Business School and Kennedy
School of Government.
Mukund Mohan | Director | Microsoft Ventures
Mukand helps startups and large enterprises at Microsoft. He founded and sold BuzzGain, a leader in do-it-yourself PR, in 2010.
Before that, he founded and sold two Silicon Valley startups in the Internet and enterprise software markets. He has also failed at
three startups.
Besides having held executive and management roles in Hewlett Packard (Mercury), he has also worked at Cisco Systems as
an Engineer. He studied at the University of Maryland, Baltimore County pursuing a Master’s degree in Computer Science
and has a Bachelor’s degree in Engineering and Computer Science from the University of Mysore in India. He blogs at www.
bestengagingcommunities.com.
Kevin Ober | Managing Director | Divergent Ventures
Kevin Ober is a Managing Director of Divergent Ventures. Prior to Divergent, he spent 7 years with Vulcan Ventures, a national venture
capital firm owned by Paul Allen, Co-founder of Microsoft Corporation. While with Vulcan, he led investments in Internet infrastructure
companies Internap Network Services Corporation, Nexabit Networks, Wavtrace and Net Perceptions. As a Managing Director for
Divergent, Kevin leads the entity’s investments in Pliant Technology, Flashsoft Corporation and Piston Cloud Computing. Kevin is
currently leading Divergent’s investments in Shippable, PushSpring and SpaceCurve. Kevin also served in various positions at Conner
Peripherals, Inc., a computer hard disk drive manufacturer in San Jose, California. He holds a Bachelor of Science degree in Business
Administration from St. John’s University and a Master of Business Administration from Santa Clara University.
The Moderator:
Frank Paganelli | Shareholder | Lane Powell PC
Frank Paganelli is a member of Lane Powell’s Startups and Emerging Companies Practice Group and focuses his practice on social impact
companies and investments. He is an experienced general counsel with significant corporate strategy and business management experience.
Frank works with management teams, investors, boards of directors and business owners to address strategic opportunities and challenges.
He counsels clients on issues ranging from corporate structuring and governance to capital strategies, organizational development and
commercial transactions.
Frank has held a number of executive roles for companies ranging from public telecom firm Rhythms NetConnections, where he served
as General Counsel; biofuel retailer Propel Fuels, where he acted as General Counsel and Vice President of Corporate Development;
organic produce e-commerce leader Full Circle Farm, where he was Chief Operating Officer and Board Member; and Clean Conversion
Technologies, where he served as President.
For more information or to register for our Startups and Emerging Companies Seminar, please visit our website at www.lanepowell.com.
Choice of Entity:
Choice of Entity:
By Margaret M. Grega
By Yesica Hernandez
As with most things in life and the law, choice of entity for your startup depends on the
circumstances. From an operational perspective, we typically recommend that venturebacked companies form as C corporations, as opposed to limited liability companies
(LLCs) or S corporations. There are several important reasons for this:
Due to investor preferences, startups backed by venture capital, or that intend to seek
institutional investors, generally organize as C corporations. Other startups may wish
to consider other options. Outlined below are some of the key tax consequences to
consider when selecting an entity.
• C corporations are better understood in the investment world — investors are
comfortable with and understand the C corporation structure and it makes it easier
to raise capital. There is a vast body of law and legal precedent supporting the
structure and function of C corporations, making them more predictable and
better understood generally.
Choosing the C corporation, S corporation or limited liability company (LLC) form of
organization affects tax burdens and planning opportunities in connection with exit
transactions, compensation, equity structure and tax-loss treatment.
Operational Considerations Tax Considerations
• Investors prefer them — some investors won’t (or at least strongly prefer not to)
invest in LLCs or S corporations, so why limit your investment potential from
the start?
• C corporations offer ownership flexibility — the structure allows for varying
kinds of ownership participation with no limit on the type or amount.
S corporations have special restrictions on the amount and type of investors, such
as only being able to issue common stock, no foreign investors and a maximum
total number of shareholders, and those restrictions can hurt a company’s
development in the long run.
• C corporations provide better optics for growth — they are designed to scale
up easily, whereas LLCs historically are not. You send a strong message that you
are intending to grow when you form as a C corporation, which is not necessarily
the case with an LLC.
• The governance and structure are clearer — investors understand how a Board
of Directors and corporate officers such as a CEO handle the management and
operations of a C corporation. When it comes to LLC managers and members,
and the varying combinations and control issues involved in those roles, things
get a little murkier. • It is easier to issue equity compensation — which is invaluable for attracting desirable
employees or contractors, and the C corporation structure allows for both traditional
stock options (including tax-advantaged incentive stock options) and restricted
stock. LLCs have a different and more confusing mechanism by which they can issue
the equivalent of stock options and restricted stock.
• C corporations can issue both common and preferred stock — a common request
from venture capitalists as part of their investment is preferred stock. As noted
previously, S corporations can only issue common stock.
For startup companies hoping for traditional venture capital investment, the
C corporation is the preferred choice. Of course, there are additional considerations
to take into account. One of the major considerations is the tax treatment of different
entities. For more details on that, see the next article regarding specific tax considerations
for your choice of entity.
Margaret M. Grega is an Attorney in Lane Powell’s
Business Practice Group. She has broad experience
in corporate and transactional matters, including
entity formation, mergers and acquisitions, securities,
corporate finance and general corporate counseling.
In addition, Maggie regularly advises on a variety of
commercial matters and business transactions related to
the core businesses of her clients. She can be reached at
206.223.7119 or gregam@lanepowell.com.
1. Planning for the Exit: Strategic buyers and financial investors alike will
often prefer a taxable asset purchase in order to obtain a step-up in basis.
If the company is a C corporation, an asset sale will result in a heavy tax
burden on the owners. The tax will be significantly less if the company is an
S corporation or LLC. However, corporations (both C and S) can be acquired
for stock in tax-free transactions; accomplishing the same result with an LLC
is much more complicated and costly.
2. Equity Structure: A C corporation can have both common and preferred
stock. An S corporation can only have common stock. LLCs can have equity
interests of any imaginable type. However, taking advantage of an LLC’s flexibility
can result in long, complex documents and high legal fees.
3. Equity-Based Compensation: Techniques for giving equity-based
compensation to a corporation’s employees (stock grants and options) are
easily implemented, but there are a limited number of tax-efficient
structures. LLCs offer more flexibility, but implementation requires complex
documents and greater accounting complexity.
4. Loss Treatment: LLCs and S corporations (but not C corporations) can pass
losses through to owners, but owner-by-owner limitations on the deduction
of losses may substantially undermine this benefit.
If a very simple equity structure is acceptable, founders may conclude that the S
corporation is their best choice. However, if the company’s founders prefer a more
nuanced equity structure, the LLC form tends to provide better tax-related outcomes.
The principal disadvantages of an LLC with a creative equity structure are: complex
documents, increased legal fees and a greater chance of confusion among owners.
Each situation is different, and it is important to seek professional advice from trusted
advisors when forming a company.
Yesica Hernandez is an Attorney in Lane Powell’s
Litigation Practice Group. During law school, Yesica
advised San Francisco Bay Area startups as part of
Berkeley Law’s New Business Practicum. She also served
as an Extern for the Honorable Paul L. Friedman of the
U.S. District Court for the District of Columbia.
She can be reached at 206.223.7108 or
hernandezy@lanepowell.com.
“Just a quick note to let you know how impressed I was with Lane Powell’s Startups and Emerging Companies Seminar. The entire event
was chock-full of practical and business savvy legal advice of the ‘stitch in time, saves nine (or a million)’ variety. Even as a veteran
of several startups, I heard many easy to implement strategies for improving our business through proactive legal positioning. I also
appreciate the accessibility and openness of the Lane Powell attorneys outside of the presentations to answer specific questions and post
event email follow-ups. Any startup or emerging company with the opportunity to attend this seminar would be well advised to do so.”
– Swain Porter, CEO of FEV Analytics Corp.
For more information or to register for our Startups and Emerging Companies Seminar, please visit our website at www.lanepowell.com.
IP 101: An Over view of
Intellectual Property
Protection for Your Startup
IP 102: Filing for Federal
Protection of Your
Intellectual Property Rights
By Bryan A. Santarelli
By Kevin D. Jablonski
Your entity’s intellectual property (IP) can be among its most valuable assets, and should
be protected to preserve value. This is particularly true for startups, where even a single
piece of IP can mean the difference between the entity thriving and failing.
Patents, copyrights and trademarks are intellectual property (IP) that may be federally
protected in the U.S. through an application process. Patent and trademark applications
are handled by the United States Patent and Trademark Office (USPTO — uspto.gov)
and copyright registrations are handled by the United States Copyright Office (USCO
— usco.gov). Further, these IP protections may be obtained in other countries through
various international treaties between most countries.
The major categories of IP are patents, trademarks, copyrights and trade secrets.
A patent grants to the patent holder the right to exclude others from making, using,
selling, offering to sell, or importing into the granting country/region products or
processes that incorporate an invention, which is a nonabstract idea that is new and
nonobvious in view of that which came before. Examples of patentable subject matter
include software, electronics and other products, and methods of manufacture, repair,
maintenance, performing a task and doing business. The scope of protection that
a patent affords to the covered subject matter ranges from an entire process (e.g.,
manufacturing a food item) or system/product (e.g., light bulb) to a single feature or
function of a process (e.g., the initial heating of glass in a window-making process)
or system/product (e.g., a smartphone’s display, a smartphone’s ability to rotate a
displayed image in response to a rotating of the smartphone).
A trademark is a word, expression, design, or combination of two or more of
these, that identifies the source of a product or service. A trademark may be used
in advertising, at the point of sale, or on a product or its packaging, and may be
visual or audial. Examples of trademarks include Kirkland® (visual word mark that
identifies source Costco Wholesale®), “Why buy a mattress anywhere else®” (visual/
audial expression that identifies source Sleep Country USA®),
(graphic design that
identifies source Apple®), the Intel® and T-Mobile® nonverbal jingles (audial), and
the “look” (e.g., rectangular display with square icons arranged in rows/columns) of
Apple’s iPhone® (design).
A copyright grants the copyright holder the right to exclude others from copying
a work that is in a fixed, tangible form (e.g., hardcopy, electronic). Examples of
copyrightable subject matter include written works (e.g., user manuals), photos and
videos (e.g., on websites), films, works of arts (e.g., paintings, sculptures), sound
recordings (e.g., music downloads), performances (e.g., a live band’s cover of a song),
and the pictorial, graphic and sculptural features of an article (e.g., the decorative
features of a cheerleading uniform).
And a trade secret is valuable information that the holder keeps secret. Examples
of trade secrets include food product recipes (e.g., the recipe for Coca-Cola®),
manufacturing techniques, algorithms (e.g., how an automatic external defibrillator
(AED) determines whether a person exhibiting symptoms of cardiac arrest needs a
defibrillating shock) and customer lists.
Now that you have an overview of the key IP areas that should be protected,
dive into IP 102.
Inventors file a patent application to seek a limited term right to exclude others from
making, using, selling and importing that which is claimed in the granted patent.
Types of patent applications include design patents that protect ornamental designs,
plant patents that protect strains of asexually reproducing plants, and utility patents
that protect the vast majority of inventions. Further, patent applications include
provisional patent applications and nonprovisional patent applications. A provisional
application divulges basic tenets of a protectable idea, but without enforceable patent
claims (the legally protected invention), and may be best thought of as placeholders
for nonprovisional patent applications (with claims) filed within one year of filing the
provisional application and claiming priority back to the filing date of the provisional
application. Further, inventors may file for patent protection in almost every other
country in the world as well via a Patent Cooperation Treaty (PCT) application.
Trademark applications may be filed on a 1A basis where the underlying mark is already
in use in interstate commerce or on a 1B basis where the applicant has a bona fide
intention to use the mark in commerce. Trademark applications are filed with respect to
one of 45 different classes of goods and services, and a trademark may be the subject of
concurrent applications in more than one class of goods and services.
Copyrights, different from other forms of IP, exist from the moment a work is fixed in a
tangible form and are held (without filing) by the creator. But registration of the copyright
enables the owner to sue in federal court, and infringers are subject to statutory damages
as opposed to the copyright registrant having to prove actual damages.
Kevin D. Jablonski is Counsel to the Firm in
Lane Powell’s Intellectual Property and Technology
Practice Group. He has a comprehensive intellectual
property practice, which includes patent procurement
in in electrical, electronic, semiconductor, computer and
mechanical patent matters, as well as copyright and
trademark matters. In addition, Kevin has developed
a technical focus in the audio arts and audio-related
technologies. He can be reached at 206.223.7106 or
jablonskik@lanepowell.com.
Bryan A. Santarelli is Counsel to the Firm in
Lane Powell’s Intellectual Property and Technology
Practice Group. Bryan focuses on domestic and
foreign representation in electrical, electronic,
semiconductor, wireless, computer and mechanical
patent matters, and in trademark and licensing
matters. He can be reached at 206.223.7085 or
santarellib@lanepowell.com.
“For every startup, it’s critical to save capital. This startup seminar gave us a tremendous amount
of legal knowledge while allowing us to save capital for building our business.”
– Jason Eakes, Founder of All In, LLC
For more information or to register for our Startups and Emerging Companies Seminar, please visit our website at www.lanepowell.com.
Employment
Considerations for
Startups: Hiring Your
First Employees
For (When Nobody
Knows) What It Is Worth:
Incentivizing Convertible
Debt Investors
By Rachel M. Bowe
By Matthew D. Viers
You have a big idea and you’re ready to execute, or perhaps your startup is profitable
and ready to expand. Either way, navigating federal, state and local employment laws is
a daunting and ongoing task. Make sure you or your Human Resources professionals
are informed and up for the challenge. The main issues facing startups in today’s
employment law climate include the decision to rely on independent contractors or atwill employees to sustain the enterprise, preparing appropriate employment agreements
that protect the information key to the business’s success, and developing the basic
employment policies suitable for a growing workplace.
So, how do we finance our startup when we have no assets and not even our families will
lend to us? I guess we could sell some equity, but how do we price it when we’re prerevenue and there is no way to prove what we’re actually worth?
The use of independent contractors is an obvious resource for startups to launch or
grow their business. The U.S. Department of Labor’s recently-issued guidance on the
classification of independent contractors is proof of the spotlight on this issue and the
ever-increasing trend to grant employment-like protections to this category of workers.
Know the risks and make sure your workers are properly classified to avoid costly
exposure that will otherwise eat away your bottom line.
While not all job positions warrant an employment agreement, some positions at your
company very well might. Staying relevant is critical to your company’s success and
that relevance is dependent on the security of the company’s intellectual property,
financial and marketing strategies, and client lists, to name a few. This means restrictive
covenants that prohibit unfair competition, or certain disclosure or solicitation, may be
necessary. Learn the traits of enforceable restrictive covenants to protect your business
and its future.
Last but not least, must the company have an employee handbook? Deciding the
appropriate time to issue an employee handbook depends on the size and circumstances
of your workplace. Learn some of the key policies to include and considerations to
weigh when preparing your company’s handbook.
Rachel M. Bowe is an Attorney in Lane Powell’s Labor
and Employment Practice Group. Rachel dedicates her
practice to employment litigation defense and counseling
for employers of all sizes. She has successfully litigated and
resolved a broad array of workplace disputes, including
discrimination and retaliation, wrong ful discharge,
violation of wage and hour laws, and breach of restrictive
covenants. She can be reached at 206.223.7024 or
bower@lanepowell.com.
For many of our startup clients, the ultimate answer to the above questions is to raise a
convertible debt round in which the company issues promissory notes that automatically
convert to equity in the next round of financing. This is often an attractive funding
structure for early-stage ventures because it both (i) allows the company and investors
to avoid (at least for the moment) the difficult task of valuing an enterprise with no
financials (or financials with a distressing amount of red at the bottom), and (ii) gives
founders time to prove that they have something of value so that they are not giving up
too much equity, too early.
Of course, an investor willing to put money into a startup with little or no operating
history is going to want something in return. In the context of a convertible debt
round, this “something” is most often a discount on the next equity round’s price per
share (typically between 15 and 30 percent); a “cap,” or ceiling on the next round’s
pre-money valuation; or, as we’re seeing increasingly, both. In a “both” financing, the
debt conversion price is the lower of the discounted price per share and the price per
share implied by the “cap” value, even if the actual price per share in the next round
far exceeds this latter price. Because early money is often difficult to raise, it can make
sense to incentivize convertible lenders with both a discount and cap. However, if a
company agrees to both incentives, it should negotiate for as high of a cap valuation as
possible. This can be sold to investors on the rationale that a guaranteed upside on the
Series A valuation should only be granted if the cap is an optimistic, “stretch” Series A
valuation that avoids excessive dilution that may create unintended control dynamics
and discourage future investors. If the cap is simply a lowball approximation of current
value, the company would be better off simply issuing equity at the fixed price per share.
In order to fully understand these and other convertible debt terms, it is critical to model
the effects of the conversion and future issuance in a pro forma capitalization table. We
regularly assist clients in this exercise to ensure that an early-stage financing not only
satisfies immediate cash needs, but also protects founders’ interests and sets the stage for
future investment.
Matthew D. Viers is an Attorney in Lane Powell’s
Business Practice Group. Matt focuses his practice
on corporate and transactional matters, specifically
in the areas of venture capital financing, mergers
and acquisitions, intellectual property protection
and securities law compliance. He can be reached at
206.223.7117 or viersm@lanepowell.com.
“The seminar provided a thoughtful introduction to the most common issues a startup faces, and
perhaps more importantly, it was a place to connect with like-minded professionals.”
– Jonathan Geibel, Co-founder of Pluto VR
For more information or to register for our Startups and Emerging Companies Seminar, please visit our website at www.lanepowell.com.
Raising Capital, More
Than Just a Necessar y Evil
Estate Planning
for Founders
By Frank Paganelli
By Sarah MacLeod
Most entrepreneurs hate raising money, and for good reason. It can be a frustrating,
time-consuming and even humiliating experience. For some, it’s the most difficult step
in the startup process; for others the impossible hurdle.
Founders are often extraordinarily humble when it comes to the prospect of discussing
what their personal net worth may become. Such humility may be rooted in the fact that
they hardly have time to think about such things in the midst of starting a company, or it
may be rooted in the fact that they are so focused on raising capital, it’s hard to imagine
a time when they might have “too much.” But I often wonder if founders’ reluctance
to discuss such matters is based, at least in part, in superstition. That is, talking about
money before it’s in their pockets may seem a jinx on their success.
Odd as it may sound, having raised my share of cash and advised many others, I’ve come
to appreciate the process. Here’s why:
Powerful Forcing Function. At a fundamental level, startups consist of people, ideas
and capital. People and ideas can be notoriously difficult to corral and horrifically
inefficient while disorganized.
There is nothing like the need for cash to generate focus and urgency. Take all of those
swirling ideas and condense them into a 20-minute pitch — it’s a very useful process.
As one experienced entrepreneur recently asked me, “has a startup ever failed for being
too focused?”
Energy. Telling smart, experienced business leaders your ideas can be terribly
intimidating. Often, angel and venture investors have seen thousands of deals or have
years of experience. It’s easy to imagine that virtually any concept that is about to
emerge from your mouth will be perceived as naïve, if not ignorant.
The reality is that most investors, but particularly experienced angels, truly love
listening to and coaching entrepreneurs. They appreciate the opportunity to hear your
idea, they feed off your passion and more than anything they want to help. In almost
every investor meeting there is something to learn and frequently the conversation is a
wonderful source of energy and support.
It’s the First Test. In politics, candidates for public office are commonly judged by how
much money they raise early in their race. It’s a test of credibility. If you can’t convince
family, friends, colleagues and neighbors to throw a few bucks your way, how on earth
are you going to convince a legislative district to support you? Early money attracts
supporters, endorsements and media coverage. It’s a virtuous circle of sorts.
Startup fundraising is the same. If a founder can’t put a pitch together that compels
interest, there is something wrong. The problem, the solution, the business model, the
team, the market size … somewhere there is a gap, or worse, gaps. It’s better to know
this earlier rather than later, as the cost today may only be a bruised ego.
Frank Paganelli is a Shareholder in Lane Powell’s Startups
and Emerging Companies Practice Group and focuses
his practice on social impact companies and investments.
Frank counsels clients on issues ranging from corporate
structuring and governance to capital strategies,
organizational development and commercial transactions.
He can be reached at 206.223.7077, paganellif@
lanepowell.com or on Twitter @frankpaganelli.
In my experience, the only true jinx is the failure to have conversations about wealth
planning as early as possible, because after the company is created and its value realized,
it will be too late.
In 2012, the federal estate and gift tax laws were substantially revised. Congress
reinstated the federal estate and gift tax with an applicable exclusion amount of $5
million (inflation adjusted to $5.43 million for 2015), and a maximum tax rate of 40
percent. That is, under current federal law, anything that an individual transfers during
life or at death in excess of $5.43 million is taxed at a rate of 40 percent on the value
above the $5.43 million. The only exception to this is if the transfer is made to or for the
benefit of a spouse or charity.
In addition to federal taxes, a Washington state estate tax will be imposed on estates
valued in excess of $2 million (inflation adjusted to $2.05 million for 2015). Like federal
taxes, bequests to spouses or charity are exempt from Washington’s estate tax. The
Washington state estate tax rates start at 15 percent and increase to 20 percent for estates
above $9 million.
The resulting combined tax rate between Washington and federal estate taxes is nearly 52
percent. This means, that founders who achieve great success with their companies, but
fail to do any early planning, can spend years and millions of dollars trying to pass their
wealth onto their children. Whereas founders who set aside superstitions and plan early
can move wealth to the next generation nearly tax-free.
Sarah MacLeod is a Shareholder in Lane Powell’s Trusts
and Estates Practice Group. She focuses her practice on
assisting individuals and families with estate and gift
planning, estate and trust administration, and business
succession issues. In addition, Sarah’s practice focuses
on philanthropic matters, including both advising taxexempt organizations on governance and tax related
issues, as well as counseling individuals and families with
respect to their charitable giving. She can be reached at
206.223.7721 or macleods@lanepowell.com.
“I have been an entrepreneur for 50 years, so I recognize serendipity and opportunity when I experience them. LP hit it
out of the park with their first seminar for startups and emerging companies; don’t miss the second!”
– Allan Goodman, CEO of Matrics2, LLC
For more information or to register for our Startups and Emerging Companies Seminar, please visit our website at www.lanepowell.com.